Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod‐Balassa‐Samuelson Effect?

Abstract

Using data since 1820 for the US, the UK and France, we test for the presence of real effects on the equilibrium real exchange rate (the Harrod-Balassa-Samuelson, HBS effect) in an explicitly nonlinear framework and allowing for shifts in real exchange rate volatility across nominal regimes. A statistically significant HBS effect for sterling-dollar captures its long-run trend and explains a proportion of variation in changes in the real rate that is proportional to the time horizon of the change. There is significant evidence of nonlinear reversion towards long-run equilibrium and downwards shifts in volatility during fixed nominal exchange rate regimes.* The authors are grateful to the following people who generously provided helpful and constructive comments on an earlier version of this article: two anonymous referees, an anonymous associate editor and the managing editor, Andrew Scott. They are also grateful to comments from seminar participants at Fordham University and the Universities of Cambridge and Warwick. In addition, the authors are indebted to Jay Shambaugh, who kindly provided helpful advice on the dating of de facto nominal exchange rate regimes. The authors alone are responsible, however, for any errors that may remain.1 Early studies of mean reversion in real exchange rates include Taylor (1988) and Mark (1990). 2 The cause of this nonlinearity may be greater goods arbitrage as the misalignment grows or a growing degree of consensus concerning the appropriate or likely direction of movements in the nominal exchange rate among traders, or perhaps a greater likelihood of the occurrence and success of intervention by the authorities to correct a strongly misaligned exchange rate.

The Penn Effect and Transition: The New EU Member States in International Perspective

“…Empirical work on the Penn effect like Bergstrand (1991), Lothian andTaylor (2008) or Chong et al (2010) typically studies relationships between countries' multilateral real exchange rate measures and productivities. The most popular measures of countries' multilateral real exchange rates are (i) effective real exchange rate indices, i.e., weighted sums of each country's bilateral nominal exchange rates deflated by consumer price indices with weights corresponding to the relative importance of partner countries in trade; or (ii) comparative prices (or exchange rate gaps in much of the literature), as provided in the Penn World Tables (PWT), defined as the deviation of a country's nominal exchange rate against the international dollar from purchasing power.…”

Searching for nonlinearities in real exchange rates

“…Examples of papers that incorporate the STAR and ESTAR specification include Michael, Nobay and Peel (1997), Taylor, Peel and Sarno (2001), and Lothian and Taylor (2004).…”

The Validity of Purchasing Power Parity in BRICS Countries

“…Some of the prominent studies in the literature are Roll (1979), Adler and Lehmann (1983), Dornbush (1985), Rogoff (1996), Papell (1997), Sarno and Taylor (1998), Culver and Papell (1999), Lothian and Taylor (2000), Cheung and Lai (2001), Kapetanios, Shin, Snell (2003), Taylor and Taylor (2004), Taylor (2006), Cerrato and Sarantis (2007), Lothian and Taylor (2008), Bahmani-Oskooee, Hegerty and Ku (2009), Zhou and Ku (2011), BahmaniOskooee, Chang and Hung (2013), the Bahmani-Oskooee, Chang and Wu (2015).…”